Ph.D. Octopus

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The Hubris of Free Marketeers and Posner’s Pragmatism

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This is an issue that’s been gnawing at me for a while, but it took a recent New Yorker article about the Chicago School of Economics to give it shape. I’ve been struck at the intellectual rigidity of those who call themselves economic libertarians, or laissez-faire types, or advocates of the free markets, or fiscal conservatives, or whatever you want to call them. People who think that government intervention in the economy is the equivalent of eating innocent babies. I’m talking about smart people, even smart economists, who refuse to change their views in the face of overwhelming evidence that the free market ideology has been something of a colossal failure.

I first noticed this when I saw the outlier to this trend, Richard Posner. The former lover of Milton Friedman has become a Keynesian. He has come to realize that government intervention is the economy can be useful, even necessary. But Posner’s conversion is really part of something broader, something he identified as “the intellectual decline of conservatism.” In this post of May 10, 2009, he wrote (sorry for the long quote):

By the end of the Clinton administration, I was content to celebrate the triumph of conservatism as I understood it, and had no desire for other than incremental changes in the economic and social structure of the United States. I saw no need for the estate tax to be abolished, marginal personal-income tax rates further reduced, the government shrunk, pragmatism in constitutional law jettisoned in favor of “originalism,” the rights of gun owners enlarged, our military posture strengthened, the rise of homosexual rights resisted, or the role of religion in the public sphere expanded. All these became causes embraced by the new conservatism that crested with the reelection of Bush in 2004.

Of course, as Posner notes, much of this intellectual decline has to do with fundamentalism of the religious right, the forces opposed to gay rights and abortion, as well as the failure of neoconservative foreign policy initiatives, the insane “denial of global warming,” and other policies which “are powered largely by emotion and religion and have for the most part weak intellectual groundings.” The embrace of anti-intellectual leaders like Joe the Plumber and Sara Palin represents the apotheosis of this idiocy.

Yet the economic issue, because it is more intellectually serious, is in some ways more interesting. And so Posner writes:

And then came the financial crash last September and the ensuing depression. These unanticipated and shocking events have exposed significant analytical weaknesses in core beliefs of conservative economists concerning the business cycle and the macroeconomy generally. Friedmanite monetarism and the efficient-market theory of finance have taken some sharp hits, and there is renewed respect for the macroeconomic thought of John Maynard Kenyes, a conservatives’ bête noire.

This interests me especially as a historian, and I see an interesting parallel with the ideological collapse of communism. Not long after the Russian Revolution of 1917, intellectual opponents of the Soviet Union emerged, and many were on the left. From anarchists like Emma Goldman to Trotsykites like Iriving Howe who opposed Stalin, there were no shortage of thinkers who looked at the practical realities of the USSR and saw much to criticize. By 1956, when Kruschev repudiated Stalin’s crimes, even his most vocal supporters had to recognize the truth. And the reality of prosperity in America, and in western Europe, as imperfect as it may have been, and the poverty in the Eastern Bloc, and Communist China, led many intellectuals rightward, some all the way, like Irving Kristol, Norman Podhoretz and company, but others only slightly, to an embrace of a Keynesian welfare state.

As Tony Judt’s article (which we’ve referenced before on this blog and probably will again) shows, the past few decades, in western Europe and to a lesser extent in America has seen the triumph of a moderate version of social democracy, or at least of the success of the welfare state initiatives. From FDR’s New Deal to LBJ’s Great Society and introduction of Medicare, these programs have not been smashing successes, but they have not been utter failures either, in fact they’ve mostly made the world a better place.

And so most moderate intellectuals, even those on the left, have given up on the dream of a socialist utopia, in favour of a more modest, dare I say pragmatic, welfare state, attempting to limit the worst ills of capitalism but allow for its strengths, to create a society that protects individual rights but also the broader welfare of the community.

Posner has jumped ship precisely because he is a pragmatist. He looked at the evidence, and saw the absolute embrace of the free market as a failure. He has come to recognize this embrace of the free market not as a theory, but as an ideology, something rigid and inflexible, something that doesn’t respond to the evidence. For all there is to criticize about Barack Obama, I am sympathetic to his resistance to “ideology” for this reason. Yes, I would prefer if he more profoundly supported the welfare state. But I respect at least his rhetorical willingness to examine the evidence and see what works best.

In 1963, Sir Karl Popper wrote a famous essay called “Science as Falsification.” He wrote that “the criterion of the scientific status of a theory is its falsifiabilityor refutabilityor testability.” He criticized Freudian psychoanalysis and Marxian economics on the ground that they were not falsifiable. Their advocates found evidence in every result, even ones that seemed to blatantly contradict these “theories.” The Marxist revolution never happened, so Marxists tweaked the theory, rather than abandon it. They forced a strange fit of theory and fact, rather than simply form a new theory. Einstein’s Theory of Relativity, on the other hand, is a valid theory, because it is testable, the results came in, proving it right. If different results has come in, the theory would have been proven wrong.

There is much of value in Marx (and some, maybe a little bit, in Freud). But in my view, history and experimentation have mostly proven these theories wrong. Which is why today they exist mostly as ideologies. Notions of the perfection of the free market, that it leads to the best possible outcomes, exist the same way.

And yet, I have detected an extreme hubris on the economic right. A belief that the free market has never really been tried, that government is the problem, etc. etc. The denial is incredible. In the face of overwhelming evidence to the contrary, economic conservative refuse to embrace government healthcare, financial reforms to limit the power of banks, etc. Just let the market do it’s thing and everything will be all right.

Economic libertarianism and laisszes-faire policy can be a political or moral preference, but at this point, the evidence suggests that it is not a workable theory. It does not accurately describe the way the economy functions, or at least not the way the economy functions best. Many (most?) on the left have abandoned Marxism, Communism, and even socialism, in favour of a more moderate embrace of a welfare state in a capitalist world. It’s time for free market ideologues to abandon their ideology as well, and head left-ward.


Written by David Weinfeld

February 16, 2010 at 10:34

7 Responses

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  1. Free Market ideology, to an extent, has seemed to be as much a power game as an economic one. Say you have a bunch of wealth, and then the market opens up even more, then with your wealth you gain more wealth, you eat it up because you’ve got the power to do so, and so now you have more power, you are more entrenched, blah blah blah…of course there’s the Elect issue and Ayn Rand’s “greed is good” and people (mostly men) who think by identifying with this Free Market idea it somehow makes them more rugged and/or manly, macho, etc…they can put their shoulders back like W Bushie and say “I’m a free market man.” I’ve got real blue collar union type dudes as friends who are hardcore about the Far Right Vision of the world, it’s very weird. It’s like they don’t get the idea that without intervention they’d be working 12 hours a day 7 days a week for under ten bucks an hour without benefits…free markets lead to monopoloy and oligarchy, that’s just the truth.


    February 16, 2010 at 10:59

  2. You had me until the very end, Dave. You dismiss the fact that a truly free market hasn’t existed in the United States as something minor.

    The birth of the First and Second National Banks and the insistence upon a fiat currency ultimately resulted in weakening your buying power to the tune of 90% or more. I’m not well-versed on economic theory, but it seems to me that you’d want to either stabilize or increase your currency’s value. Not the other way around.

    The government underestimated the costs of Social Security and Medicaid by billions of dollars. Smart money is on them doing the same thing in regards to public healthcare. That’s a little scary for middle America when the projected shortfall is already at 1.3 (!) trillion.

    I voted for Obama by the way, and I’d do it again. I believe government programs can work when they’re run well and incentivized. But I’ll say this: Government programs that don’t deliver a measured ROI are as ineffective as their private sector counterparts. I’m looking at you DEA, Department of Education, Department of Homeland Security, Social Security, etc.

    We need more fiscal conservatives in the Democratic Party who respect (or hell…have read) the Constitution. Gay rights are theoretically already preserved by equal protection clause of the 14th Amendment. Why not enforce existing laws rather than create new ones? While I’m at it…why are you required to get permission from the state to get married to your partner – gay or straight? Seems like a major violation of my rights.

    Anyway, the blog’s been great so far. Enjoy my 2 cents. Perhaps if we didn’t federalize banks it would be worth more.

    Matt DeSiena

    February 16, 2010 at 11:36

  3. Also, as a side note, allow me to be Mr. Obvious Here and add that no theory has or will ever fit to life, like, ever (and really that would suck if it was the other way around)…and so here we are at that famous paradox, right: this sentence is a lie…it’s OK to laugh.


    February 16, 2010 at 12:00

  4. Matt DeSiena

    February 16, 2010 at 12:13

  5. Ok, fair enough, but I’m sick of debates that look for eternal truth in a universal free market vs. government intervention debate. If by “move to your left” you mean some ideologues should consider more the idea that government intervention can be beneficial, fine. But some also want to use the financial crisis as “proof that market don’t work” and justify any form of government intervention. This is nonsense. Markets (i.e. individuals making free, voluntary exchanges) do some things well, and governments do some things that markets can’t do well (crony capitalists, who use government to suit their interests, do nothing well). Much of our improvement in standard of living has come from individuals freely innovating and reaping the rewards of the free market, but government has had its share of successes that would likely never have arisen with its powers for coercing collective action. Individuals can make good decentralized decisions based on prices and respond to incentives. Government action can help when those prices don’t reflect true costs. Government intervention can also give too much help to entrenched interests and prevent new ideas from rising to the top. Government doesn’t necessarily have enough information or resources or right incentives to do what too many people believe is possible. We need to think on a case-by-case basis about when government intervention is the best solution.


    February 22, 2010 at 07:14

    • DRDR, I agree with your case-by-case view, but the idea that any government intervention is anathema has got to go. If you were to frame the debate as “free market vs socialism,” for example, than some government intervention, ie. a strong welfare state functioning within a capitalist market, is a decent middle ground. We would still need the case-by-case basis to figure when markets work best and when government works best, but the principle for some government intervention is a solid foundation.


      February 22, 2010 at 18:54

  6. […] wing humanitarian hawks. And Richard Posner “became a Keynesian,” which I wrote about here. Most notably, Diane Ravitch, former champion of charter schools and standardized testing and […]

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